Americans should be afraid of the long term value of the dollar. The country has massive fiscal imbalances that only look to be worsening. The social-political trajectory we are on is not likely to change, so a prudent thing to do is start transferring assets out of the country. A great way to do that is to buy foreign currencies. Exchange-traded funds (ETF’s) allow the regular investor to gain exposure to a variety of the world’s largest currencies, including Euro, British Pound, Canadian dollar, Australian dollar, Japanese Yen, Swedish Krona, Mexican Peso, and Swiss Franc.

The great thing about currency ETF’s is that they are passively managed, pay dividends, and are structured to mimic the movements of their respective currencies. Portfolio theory suggests the best way to lower risk is to diversify, but stocks are correlated to other stocks, and all stock markets around the world are tied to each other. Going into bonds is useful, but then you sacrifice yield, which should be an important consideration for the young investor. Currency ETF’s are a great candidate for a long term portfolio, particularly because they have minimal correlation to other assets.

Correlations were derived using weekly return history relative to the Russell 2000 index of U.S. stocks. A perfectly correlated asset, with a 100% value, would move exactly the same as the stock market, while a perfectly negatively correlating asset (-100%) would do the exact opposite. The above table shows that currencies have little in common with stocks, meaning they are great candidates for your portfolio.

Keep currencies in perspective and add them to your long term holdings in moderation. Asset class diversification is key, so don’t overweight in any particular area. I also recommend choosing a small handful of currencies, since they are all extremely correlated to the U.S. dollar, and hence to each other. For instance, from the same data set as the above calculation, the Euro and Swiss Franc are 85% correlated. It would not make sense to add both of them to your portfolio.

No related posts.

Related posts brought to you by Yet Another Related Posts Plugin.